June 7 (Bloomberg) -- Moody’s Investors Service is altering
how it assesses the weakest shopping-mall loans packaged into
commercial-mortgage bonds to compensate for a growing number of
properties that may struggle to survive.

The gap is widening between strong shopping centers that
can attract tenants and those that may be on a path toward
liquidation amid “sluggish” economic growth, Moody’s said in a
report being published today. After seeing an increase in malls
that raise “concerns about their long-term viability,” the New
York-based ratings firm said it will account for potentially
greater losses for such properties, which it said can make up 5
percent or more of loans backing commercial-mortgage bonds.

“If Moody’s determines that a mall’s long-term viability
is in doubt, we may introduce stress scenarios beyond those
contemplated in our rating approach, which assumes long-term
operational viability as the benchmark,” Moody’s analysts Rob
Paltz, Tad Philipp and Nick Levidy wrote in the report.

Retail properties make up a greater share of commercial-mortgage bond deals issued during the past two years than those
sold during the market’s boom. Wall Street banks have struggled
to compete with other lenders including insurance companies and
government-backed Fannie Mae and Freddie Mac on office buildings
and apartment complexes, pushing them toward malls and other
shopping outlets.

Heavy Concentration

More than 20 percent of investors in a JPMorgan Chase & Co.
survey cited heavy retail concentration as their primary concern
with new commercial-mortgage bond deals, the New York-based bank
said in a February report.

Moody’s said that when it rates CMBS deals it’s starting to
incorporate an analysis based on how much the weaker properties
will be worth if the mall closes or has to be redeveloped.

“Every property has its own story,” Moody’s Philipp said
in a telephone interview. “It could be a poor mall in a great
location where the solution might be a refurbishment or a new
food court. Or you could have a property that needs to be
bulldozed.”

The losses on failed malls tend to be higher than for other
types of commercial property, the Moody’s analysts said. A
mortgage on a mall in Greely, Colorado took a 96 percent loss
when it was liquidated in May 2011, according to Moody’s. The
$41 million loan was packaged into a $4.6 billion offering in
2006 by Merrill Lynch & Co., the brokerage firm now owned by
Bank of America Corp., according to data compiled by Bloomberg.

Delinquencies Fall

The proportion of loans linked to retail buildings in
commercial-mortgage bond deals rose to 45 percent for bonds sold
in 2011, from 25 percent for 2007, according to JPMorgan Chase &
Co. More than half the loans in a transaction being marketed by
Wells Fargo & Co. and Royal Bank of Scotland Group Plc are
linked to retail properties.

Late payments on retail mortgages packaged into securities
declined 0.16 percentage point to 7.57 percent in April,
according to Moody’s. That compares with 7.62 percent a year
earlier. The delinquency rate for all property types rose 0.25
percentage point to a record 9.76 percent in April.